This morning crypto advocates and the crypto curious alike woke up to the news that asset management giant Fidelity will start allowing investors to put bitcoin into their 401(k) retirement savings accounts. On its surface this looks like an easy way for individuals to get access to this emerging asset class in an advantageous way from a tax perspective. However, there are still some important considerations to take into account.
Here is what you need to know.
The service will be available later this year to participants in employee-sponsored retirement plans offered by Fidelity—but only if an employer opts to offer it. Annual gains in a 401(k) are tax deferred, which eliminates the hassles associated with crypto investing and annual tax reporting. Withdrawals from a 401(k) in retirement are either taxed as ordinary income (if you contributed to a traditional pre-tax account) or tax-free (if you put after tax dollars into a Roth account).
According to The Wall Street Journal fees on these investments will range between 0.75%-0.90%, plus trading fees which falls within the mid-range of spot market trading fees offered by most major exchanges in the U.S. such as Coinbase, Gemini, Kraken, FTX.US, and Binance.US. Additionally, for now, employees will only be able to allocate a maximum of 20% of their currently account balances and new contributions to bitcoin.
The service is going to be slowly rolled out over the course of 2022. Currently the only firm to have publicly signed on is business analytics firm MicroStrategy. Led by billionaire bitcoin bull Michael Saylor, MicroStrategy is the world’s largest corporate holder of bitcoin with a treasury topping $5 billion worth of the asset. And again, your employer will have to agree to offer the service. Some may balk at the asset’s volatility.
Back in 2013 you could purchase a single bitcoin for under $300. As of this writing, a whole bitcoin will run you approximately $40,000. This is gargantuan growth, but it has not been smooth.
There have been multiple occasions where bitcoin and other leading crypto assets have lost well north of 50% of their value (many of which happened before the industry broke into the mainstream consciousness). However, many investors likely remember bitcoin approaching $20,000 in late 2017 before losing 75% of its value in the subsequent months.
We saw another such drop during the late fall when bitcoin fell from $69,000 to the low $30,000s. Bitcoiners will tell you that the asset more than recovers each time that it gets knocked down. In fact, many consider riding these boom and bust cycles as a rite of passage. But it might not be for everyone.
While there may have been cheering throughout #cryptotwitter that Fidelity is letting clients dip their toes in bitcoin, the government may not be as happy. For starters, federal regulators have been very reticent at letting investors get easy exposure to the crypto spot markets, even bitcoin.
Famously, the Securities and Exchange Commission is yet to approve a bitcoin spot ETF (it has approved a handful of products that offer exposure to bitcoin futures contracts), often citing the market’s vulnerability to fraud and manipulation.
When it comes to retirement planning, volatility again comes into play. Bitcoin is down nearly 40% from its all-time high of just under $70,000 last November, and retirees and those soon to retire may not have the funds or time to ride out these boom and bust cycles. In fact, last month the Department of Labor issued a notice expressing several concerns with investing retirement funds in crypto.
Chief among them were the market’s extreme volatility, its emerging (cloudy) regulatory status, the inability of investors to make informed decisions, as well as more basic concerns about the security of holding crypto assets, which have become juicy targets for hackers. Labor’s concerns matter because it has a say in the regulation of employer sponsored plans.
In addition, when news came out last July that Coinbase, the largest crypto exchange in the U.S., had partnered with a retirement firm to offer such services, David John, a senior policy advisor at AARP Policy Institute and the deputy director of the retirement security project at the Brookings Institution, told Forbes: “Crypto itself is fascinating, and intriguing as it starts to develop, but it’s still in its early phases.
And it is definitely not appropriate for retirement investing.” Added John: “The fact is that for retirement investing, you want growth, and you want a limited amount of volatility. The older you get, the less you want your portfolio to gyrate up and down, because it makes it very hard to plan your retirement income.”
While Fidelity is a world unto itself when it comes to asset management and retirement savings, there are other ways to get your retirement savings access to crypto. Firms such as Kingdom Trust, iTrust Capital and BitcoinIRA let investors purchase digital assets via exchanges and hold them in individual retirement accounts.
Additionally, Coinbase partnered with ForUsAll in June to let participants in employer sponsored plans purchase dozens of different crypto assets and hold them in tax deferred programs.
Finally, if you want exposure to the industry but don’t want to directly hold digital assets, there are plenty of stocks and ETFs that track companies operating in the crypto industry that are highly correlated to the underlying assets.
Saving for retirement is a personal decision, and your strategy – from what to hold to allocation percentages must —depend on your specific circumstances. Please seek out a Registered Investment Advisor or other professional advice before making any big decisions.
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